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A reservation of rights letter sent to a named insured will not be adequate to reserve rights against an additional insured.

In a timely fashion, a reservation of rights letter must properly and adequately reserve the carrier’s rights to deny defense and indemnification.

Erie Ins. Exch. v. Lobenthal stresses an insurer’s duty to issue a reservation of rights letter to any and all insureds, including additional insureds and potential insureds, as quickly as possible, to avoid a presumption of prejudice.

On April 15, 2015, in the case of Erie Ins Exch. v. Lobenthal, 114 A.3d 832 (Pa. Super. 2015), the Pennsylvania Superior Court addressed the validity of a reservation of rights letter issued by the insurer. The Superior Court found that two separate reservation of rights letters were both ineffective: the first was improperly addressed, and the second was sent seven months after the underlying complaint was filed.

In the underlying case, the plaintiff filed suit against the parents of the driver, as well as the driver, of the insured vehicle. The defendant driver, who was a minor at the time, was involved in a motor vehicle accident while she was allegedly driving under the influence of a “controlled substance.” The named insureds on the subject policy were the defendant driver’s parents. The defendant driver was an additional insured by virtue of the fact that she resided with her parents. Initially, the defendant driver’s parents were named defendants in the lawsuit but were dismissed after filing preliminary objections.

At some point after the accident, a reservation of rights letter had been sent to the defendant driver’s parents only, and no reservation of rights had been initially issued to the minor driver. Thereafter, about three-and-one-half months after the dismissal of the defendant driver’s parents, and about seven months after the filing of the complaint, the insurer issued a second reservation of rights letter directed only to the lawyer of the defendant driver.

Erie then filed a separate declaratory judgment action that sought a judicial determination regarding whether the “controlled substances” exclusion contained in the policy would bar defense and indemnification obligations. A further focus was whether Erie had properly preserved its right to challenge coverage and deny a defense to its insured through the reservation of rights letters sent out to the defendant driver.

On appeal from the trial court’s order holding that Erie had no duty to defend and indemnify, the Superior Court held that the letter directed to the parents was insufficient notice since it was addressed to the named insureds, as opposed to the additional insured, who had since attained majority status. The Superior Court also noted that the first reservation of rights letter was inadequate in that it did not reference the controlled substances exclusion of the policy upon which the insurer was relying. In addition, in considering the letter subsequently sent to the defendant driver’s counsel, the Superior Court held that Erie was required to give the defendant driver independent notice of Erie’s reservation of its rights to disclaim liability, and, therefore, the notice sent to defense counsel was ineffective as to the defendant driver. Further, the court commented that the letter sent seven months after the complaint had been filed was untimely. Ultimately, the Superior Court reversed the trial court and held that liability coverage should be afforded by the insurer to the defendant driver because the insurer did not properly and timely reserve its rights.

Of significant importance was the court’s statement that is was not impressed by Erie’s argument that the defendant driver was not prejudiced by the so-called untimeliness of Erie’s reservation of rights letter, given the fact that the defendant driver was defended by assigned counsel all the while. Rather, the court decided that, under these circumstances, where a liability carrier allegedly fails to issue a timely reservation of rights letter, prejudice was “presumed.”

This decision may ultimately have a significant impact on establishing protocols for issuing reservation of rights letters. Clearly, the specific facts of Lobenthal dictated the outcome at the Superior Court. However, one senses an increase in judicial scrutiny applied to an insurer’s reservation of rights. This case stresses that an insurer has a duty to issue a reservation of rights letter to any and all insureds, including additional insureds and potential insureds, as quickly as possible, or prejudice will be “presumed.” An insurer must specifically address the reservation of rights letter to the individual or insured to whom it is directed-not merely the named insured on the policy-or, as in this case, to defense counsel retained by the carrier. In addition, this decision stresses the importance of specifically identifying the applicable exclusions and other insurance provisions relied upon by the insurer in the reservation of rights letter.

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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